China Stocks Slide as Liquidity Tightens; Beginning of the End for Commodities, Property?

The Shanghai interbank offered rate – or SHIBOR – spiked to a 25-month high of 2.85% last week.

Photographer: Xaume Olleros/Bloomberg

The cost of short-term lending in China has been creeping up over the past couple of weeks as Beijing took a tightening stance on monetary policy in recent months and toughened controls on wealth management products and certificates of deposit.

While the People’s Bank of China has attempted to soothe concerns of a liquidity squeeze in China’s financial system with its largest single-day cash injection since January last Wednesday, it only provided temporary calm that didn’t preempt the spike in SHIBOR last Thursday.

It’s not just the interbank market that’s encountering tightening liquidity, the bond and home loan markets also appear to be in the same boat. Nomura analyst Sophie Jiang notes:

10-year treasury was back to 3.55%; bond cancellation was RMB140bn in April and higher vs. aggregate RMB124bn cancellations in 1Q17 10-year treasury was also back to a 22-month high of 3.55% as of latest (4 May), and 18bps above the December 2016 peak of 3.37%, though credit spread eased by 23bps to 164bps. Per WIND, the total cancellation and delay of bonds issuance in April 17 has reached RMB140bn, exceeding the total of RMB124bn in 1Q17, or RMB109bn in Dec-16 during bond correction.

Chinese media have reported that large banks in Beijing are now pricing new mortgages at benchmark for first home buyers and charging 20% premiums for second home buyers as the lenders grapple with rising fund costs and net interest margin pressures.

China’s tightening liquidity has wreaked havoc for commodities, which have been a popular play thing for Chinese speculators. Tightening liquidity is also expected to constrict real demand for commodities such as iron ore, copper and coal. Signs of increased supply have also added to pressure on prices. Iron ore prices dived as much as 6% in a single day last week, while copper is down almost 5% over the past week.

Property in top tier Chinese cities, which has also been at the center of a liquidity-fueled rally, has held up despite aggressive cooling measures from Beijing. But there are signs that prices and sales volumes may have peaked and rising home loan rates could serve a heavy layer of added pressure.

Concerns about tighter liquidity have weighed on Chinese stocks. The Shanghai Composite is down 0.9%, its fifth consecutive daily decline. The CSI300, which tracks stocks listed in Shanghai and Shenzhen, is down 0.9% and down for a sixth consecutive session.

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China Stocks Slide as Liquidity Tightens; Beginning of the End for Commodities, Property?

The Shanghai interbank offered rate – or SHIBOR – spiked to a 25-month high of 2.

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